As we all arrive back after the Easter break, it is worth reflecting on the signals that we are seeing in our markets and what they tell us about the industry today. Major programme providers have reported reduced earnings in the first quarter of 2019, compared with the same period in 2018. Reasons for this seem mixed, ranging from regulatory balance sheet constraints through to the absence of specials activity. Whilst it is hard to judge what is the predominant factor that is depressing revenues, the industry is clearly under some pressure as trading desks and senior management look at budget targets for 2019, that were set against the strong performance seen in 2018. Inevitability, when revenues are under pressure, firms look to reduce their cost base to maintain their bottom-line performance. Here, initial signs are not good either with the regulatory imperatives that are SFTR and CSDR demanding attention and resource. Here however, I do see the potential green shots of a real opportunity for the industry that will over time radically change the cost base of the industry. Much of the work we are doing at ISLA around SFTR is driving the market towards the adoption of a standard operating model, built around common data definitions and consistent interpretation of life cycle events. Once this work concludes, it will then be only a potentially small step to effectively codify these best practice parameters in the form of a Common Domain Model (CDM). Adoption of a CDM across the industry can also drive further settlement efficiencies, that will reduce the impact of fines for failed settlements and mandatory buy-ins under CSDR as the greater adoption of these best practice models will benefit all market participants.
Settlement efficiencies and collateral harmonisation are also expected to be a theme that will be given greater attention across Europe by the new European Commission (EC) that will start it’s work later this year. The European Post Trade Forum (EPTF) which concludes its initial work in August 2017, was a cross industry wide group that was mandated by the EC “to support the work of the Commission to review the developments in post-trading, including collateral management services, in line with the CMU, in order to promote more efficient and resilient market infrastructures in the EU”. In a post Brexit world where the EU27 would not necessarily have access to the same liquidity pools principally in the London market, it will be important to create a greater level of market and trading liquidity within Europe. In that regard, we are tracking closely the work of the AMI-SECO Harmonisation Steering Group that was established under the umbrella of the European Central Bank (ECB). Interestingly and very much in line with the work ISLA is doing around the development of common standards, one of the key areas that the AMI SECO Group is considering is harmonisation of the handling and control of corporate actions. For those of us familiar with our industry, you will appreciate how much of an issue this has been for securities lending participants, including the development of automated platforms and central clearing models. Some form of CDM could be part of the solution as it would provide a consistent platform from which market participants and vendors alike can work from.
More broadly, whilst we do expect both the Fintech and collateral agendas to figure heavily during the tenure of the next EC, we also foresee considerable focus on Sustainability. Anyone travelling into London recently, may have had to navigate their way past various climate change protesters. Whilst many of us would fully support the broad aims of this movement, I think it is fair to say that governments do recognise the need for change in this area, and the EC are already down a path which has potentially significant implications for our industry. In the context of both asset allocations and lending opportunities, it will be important that our industry can effectively support the lending of sustainable funds to provide investors with good price discovery and effective secondary market liquidity. To do this, our market must develop appropriate collateral tools including so called ‘green’ collateral schedules that will not compromise the integrity of the fund. Secondly, we must also be aware of the growing importance of good corporate governance and responsible investment criteria, and how this interacts with securities lending. Those of you familiar with some of our previous comments on this point, will know that ISLA firmly believes that securities lending can go together with good corporate governance, but that appropriate procedures and operational thresholds must be embedded within any given lending programme.
Andrew Dyson, CEO